ICICI Lombard tightens grip on profitability in a lean growth quarter

If the first quarter metrics of ICICI Lombard General Insurance Co. Ltd are anything to go by, the general insurer could see another year of strengthening profitability, something that prompted investors to send the stock up over 3%.

The largest private sector general insurer reported a reduction in its combined ratio to 98.8% for the quarter ended June from 102.4% a year ago. What this means is that the insurer’s losses and expenses as a percentage of the premiums it earned have come down and it has begun creating value through its underwriting business.

Indeed, its expenses have shown a reduction as is reflected by the drop in management expenses to 18.9% from 22% a year back. The loss ratio, which is the difference between claims paid and premium earned, too has dropped to 76.9% from 78.1%.

The insurer has achieved this partly by avoiding underwriting risks that were not priced appropriately. A case in point is the 12% growth in crop insurance, which is a far cry from the industry growth of 73%. Recall that the insurer’s loss ratio for this segment had surged to 135% in the previous year due to an underwriting loss of ₹ 700 crore.

Even motor insurance, which has a large share in the company’s portfolio, grew at a modest pace of 6.8% in terms of gross direct premium. The total gross direct premium income growth was therefore lower at 13.7% from 15% a year ago.

Interestingly, the insurer has seen lower growth in government-linked business too, specifically the mass health segment, apart from crop insurance. The share of mass health insurance in total gross direct premium income for the health insurance segment fell to just 2% from 3.6% a year ago.

Nevertheless, a slowdown in growth is expected as typically the first quarter is considered a lean season for general insurers. For the full year, the management expects a growth rate of 15-20%.

Although the ICICI Lombard stock is down over 2% in the last three months, it trades at a multiple of 5.3 its estimated book value for fiscal year 2020. Most analysts have a buy rating on the stock given the improving profitability metrics.